STRATEGIC ALLIANCE FOR THE DUTCH CONSTRUCTION INDUSTRY

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1 Second International Conference World of Construction Project Management 2007 Prof. H.A.J. de Ridder, Prof. J.W.F. Wamelink (Eds.)! TU Delft, The etherlands STRATEGIC ALLIACE FOR THE DUTCH COSTRUCTIO IDUSTR A.F. Snijders* and R.P. Geraedts *Heijmans Infrastructuur B.V., Graafsebaan 67, 5248 JT Rosmalen, The etherlands Web page: Delft University of Technology, Faculty of Architecture, Berlageweg 1, 2628 CR Delft, The etherlands Web page: Abstract. This paper describes a possible setup for strategic alliances within the Dutch construction industry. It will compactly describe a general organizational setup as well as a judicial setup and apply this setup to a group of companies who aim together to design and construct houses according to the principles of mass customization. 1 ITRODUCTIO Cooperation within the Dutch construction industry is gaining interest. The studies after project-based alliances carried out by the Faculty of Architecture of the Delft University of Technology are proving this development. The knowledge of project alliances gained by these studies invoke the question whether long term, process focused alliances the so-called strategic alliances can also form a useful way of cooperation between construction companies. Vereniging EspritHuis is a Dutch association of construction companies, searching for a new way to develop and construct individual houses based on the mass customization principles. Mass customization gives the customer the freedom of choice within his/her budget and taste to configure the final product. The products of which the customer can choose from therefore have to be able to function with all the other products of the bidding companies. This is why mass customization requires the bidding companies to exchange all ins and outs of all the products they want to make available to the customers. The development of a product catalogue for a mass customization housing project which is where Vereniging EspritHuis is aiming at will require the investment of time and intimate cooperation to make it happen. The goals of the development process of Vereniging EspritHuis seem to have strong parallels with the general characteristics of a strategic alliance. To verify if this is true this paper will first look into the organizational and juridical setup of the strategic alliance and secondly try to apply the strategic alliance model to Vereniging EspritHuis.

2 2 THE STRATEGIC ALLIACE To understand the strategic alliance we must give our definition: A strategic alliance is a cooperation with a duration longer than a project, which has the intention to change the product market competence combinations of the participating partners. These partners share the rewards and risks. They conscientiously create a level of mutual dependence and exclusivity, without losing their independency. Implicit rules of trust and equality apply to the mutual interaction and attitude. If we unravel this definition we can define the following characteristics of the strategic alliance. 2.1 A cooperation with a duration longer than a project First and foremost the strategic alliance is based on a long term cooperation a cooperation longer than a project. The long unfixed duration of the cooperation is the most important distinction between the project alliance and the strategic alliance. This characteristic has its influence on all the other characteristics of the strategic alliance. 2.2 Heterogenic partners The second characteristic is that all partners have their specific abilities, for example knowledge, financial or technical ability. Combining this difference in ability should allow the partners to achieve a goal that they individually could not have achieved. This means they aim to improve the market competence of their products by combining them. 2.3 Sharing rewards and risks Thirdly, the partners share all benefits and burdens of the alliance. Sharing is positioned here in sharp contrast with dividing. Sharing risks means that every partner is responsible for an equal part of every part of the cooperation. So, all partners share the costs of the loss if one part of, for example, a development project fails. When risks are divided only the partner responsible for the failing part is faced with the implications of the loss. When risks are shared, the partners have to depend on and trust the other partners to make the effort necessary to make the cooperation a success. Even though there is a level of exclusivity between the partners, the partners are independent. An alliance is a cooperation and not a merger or takeover. The partners remain individual companies, that can take part in or initiate projects en processes on their own account. 2.4 Trust Finally, strategic alliances are based on trust between the mutual partners and in within the process. There is not much chance of success and even survival of the alliance if the bond of trust is too weak. The partners will most likely lose interest in the process at an early stage. Cooperation as equals is important to gain and keep trust between the partners. An hierarchical structure undermines the initiative of the separate partners: the partners lower in the hierarchy will be more likely to wait with putting in effort until they are told to do so. This

3 doesn t fit the intention of a cooperation like the strategic alliance. 2.5 Process Incentives are given to partners who have shown better effort than other partners. This stimulates the partners to invest in the process. Strategic alliances can benefit greatly from this form of stimulation, but the way the incentives are given must be carefully defined. The partners must at least agree on why and when and how incentives are given. In contrast with project alliances, the issue of when an incentive is given may be quite difficult for strategic alliances. Projects have easily definable milestones, while in development processes a lot of time can pass before a foreseeable milestone will pass. This is important because incentives lose their effect if they aren t given at regular intervals. If the interval between the moments the incentives are given is too big, the partners will lose trust in the incentive system. When a SWOT-analysis - based on the characteristics of the strategic alliance - is made, the organizational aspects of the cooperation stand out. It this case this means that the alliance must develop and implement good management strategies for the internal organization and process management to maximize the potential success and minimize the chances of failure. 3 LEGAL ASPECTS A company doesn t just have an organizational setup, it also has a legal form. Dutch law, like probably any other country s law system, holds many legal forms. The two forms of limited companies and three (main) forms of partnerships have been reviewed for their use as a legal form for a strategic alliance. To make a choice we first researched the main characteristics of the two types of legal forms Limited companies The Dutch limited companies (respectively the private limited company B.V. and the public limited company.v.) are companies that are initially funded by the sale of shares in the company. The legal forms themselves are bearer of (legal) rights and obligations. (Individual members of) the boards of directors are not personally liable for obligations of the limited company to any third party. Other characteristics are the formal structure (the owners shareholders and the directors have separate roles), the list of requirements to establish a limited company (amongst other things: a minimum financial buffer, a notary script of the establishment, a declaration of no known objections from the Ministry of Justice) and the compulsory nature of the legislation. Besides the above mentioned characteristics the limited companies have a strongly hierarchical structure. This is a difficult trade for a strategic alliance, which is so specifically based on a balanced cooperation between more or less equal partners. 1 Fiscal characteristics have not been taken into account.

4 3.2 Partnerships The Dutch partnerships (which are going to be renamed as from January 1 st 2008) are much more flexible. The nature of the legislation for partnerships is directive (sections of the law are only compulsory if explicitly stated to be so in that section of the law). Besides that, the partnerships are based on the cooperation within the partnership as equals. The partners have to make all decisions together, not just on the general policies, but also on all practical issues. Another important difference to the limited company is that in partnerships ownership and power are not separated but both in the hands of the partners. Besides that there are many ways in which the partners can contribute to the partnership. This can be money, but also work, knowledge or even goodwill. It can be anything which can help the partnership reach its goal. The partners have to decide what the non-monetary input is worth, though, because that sets the share any partner has in the partnership. This is not a share as the limited companies have, but more like the weight of the vote each partner has. The share is also less fixed than the shares of limited companies, because input can be revalued or added relatively easily. 3.3 Choosing the right legal form Following the characteristics of the two main legal forms, the partnership fits better with the strategic alliance. To make a choice between the underlying types the flowchart below has been constructed. Partners wanting to start a strategic alliance can find the correct form for their alliance by answering the questions. The choices at the numbered points in figure 1 are: 1 Partnerships Limited companies 2 PLC/ LLP Other partnerships Privat P LLP 5 LLP-P LLP Public P Figure 1: flowchart for determining the legal form for a strategic alliance. PLC: Private Limited Company. LLP: Limited Liability Partnership. PLC/LLP: A combined legal form which has the characteristics of a LLP but gains liability protection from the PLC. Private P: private partnership (a partnership which is not known to any third party). Public P: public partnership (a partnership which actively and openly takes part in the market). LLP-P: limited liability partnership in which the partnership can bear the rights of ownership. PubP- P: public partnership in which the partnership can bear the rights of ownership. 5 PubP-P PublicP 1. Is the basis for the cooperation a cooperation as equals between the partners? 2. Do the partners run a greater risk within the cooperation than they are used or willing to take?

5 3. Do the partners have the wish to have the cooperation to be known on the market under one common name? 4. Are there partners who only wish to put money in the cooperation and have no say in the policies of the partnership? 5. Do the partners want to transfer the ownership of all input to the partnership (and pay conveyance duty)? 3.4 Competition act It depends very much on the specific composition and goal(s) of the strategic alliance if it is within the regulations of the competition act. The establishment of a strategic alliance by large companies will almost certainly require at least the request of a license. It is therefore wise to contact the Competition Authority before establishing a strategic alliance. In general, strategic alliances may be established if the establishment doesn t result in a position of power (for instance a monopoly) in the market and the consumer has more choice as a result from the establishment. 4 STADARD STRATEGIC ALLIACES With the acquired information we now can construct an organizational and legal setup for a strategic alliance. Strat. All. AGB 4.1 Organizational setup The basic setup of the organization of a strategic alliance is depicted on the right. The alliance (Strat. All.) contains three layers. All partners are represented in each of these layers. The layers are: the Alliance Governing Board (AGB), the Alliance Management Team (AMT) and the Operational Layer (OL). The AGB decides on the policies and goals for the alliance. The AMT is responsible for the daily management of the strategic alliance and translates the policies and goals the AGB makes into actions for the OL. The OL does the real work. For example, the AGB can decide they want to make kitchen sinks. The AMT translates this in a list of requirements, which the OL in return translates in technical drawings. If the strategic alliance consists of more than five to seven partners, the AMT cannot contain representatives of all partners at one time. This is due to the fact that the AMT will lose its decisiveness when it has too many members. An advisory panel has been drawn besides the vertical structure. The Design integrity & Quality panel () is completely independent of the partners in the strategic alliance. It monitors the process from a distance and warns the AGB when the process is going the wrong way or when friction occurs in or between the AMT and OL. The also advises a course AMT OL Figure 2: basic organizational setup.

6 of action when the AGB asks for it. 4.2 Legal setup The (public) partnership is the result when the flowchart in Figure 1 is filled in for a standard strategic alliance with small or normal risks. The special construction PLC/LLP is the best legal form for strategic alliances with larger risks. 5 STRATEGIC ALLIACE FOR ESPRITHUIS 5.1 Organizational structure There are strong similarities between the goals of EspritHuis and the definition of the strategic alliance. There are no obstacles to be found in the definition to prevent EspritHuis to form a strategic alliance for the development of mass customized housing. EspritHuis can be defined as a large alliance with small or normal risks. Despite the small risks which gives the partners the option to leave the out of the organizational setup EspritHuis would be wise to initiate the. First of all, the strategic alliance is a new organizational form which may require extra guidance from experts. Secondly, the development of mass customization housing is also a novelty where expert help could be vital for its success. The organizational diagram in Figure 2 therefore remains unaltered for EspritHuis as a strategic alliance. 5.2 Legal issues Because the development process is (or can be easily) separated from the sale of the houses EspritHuis wants to build, the risk for the partners in EspritHuis is small. The legal form for EspritHuis also follows the normal flow through the chart as the standard strategic alliance with small or normal risks. The legal form for EspritHuis should therefore be a (public) partnership. The partnership EspritHuis wants to establish, lays outside the scope of the Competition Act. This is because the main goal of EspritHuis results in extra choice possibilities for consumers and the partners in EspritHuis are too small to form an economic position of power on the market. 5.3 Growing into the structure When the partners in EspritHuis decide to form a strategic alliance, they would be wise not to step into the organizational structure in Figure 1 in one time. The steps they have to take are not big, though, because the current organization is already relatively close to the end structure. EspritHuis could do this in three steps. Below are the organizational steps EspritHuis has to take to reach the final model. In the current situation (Figure 3: step 0), Process Management fulfils several tasks. At first, it determines the policies, thus fulfilling at least partly the role of the AGB. Secondly, process management also guards the progress of the process. This is a task of the

7 AMT. Another big difference with the final model is that the OL of all partners are not a part of the structure of the current model. They can only be addressed by representatives from their own company. The first step (Figure 4) is to pull the OLs of the different partners (POL) into the partnership. The responsibility for the POLs remains with the separate companies. They cooperation cooperation Process Management Process Management Partner 1 Partner 2 Partner 1 Partner 2 POL 1 POL 2 POL 1 POL2 Figure 3. Step 0; The starting point. The POLs can only be activated or reached by the separate partners. Figure 4. Step 1; Process Management gains direct access to the POLs. These remain, however, under control of the separate partners. process organisation Partner 1 AGB Partner 2 AMT strategic alliance Partner 1 AGB Partner 2 AMT POL 1 POL 2 Partner 1 OL Partner 2 Figure 5. Step 2; Process Management changes into the AMT. It shifts to the right place. All partners are grouped in the AGB, and decide on the policies. The AMT now also is responsible for directing the POLs. Figure 6. Step 3; The OL is now a homogenous entity, which takes its direction from the AMT. The AB has an indirect grip on that by their power to set policies. can, however, be contacted directly by the Process Management. In the second step (Figure 5), the AGB and AMT must be created. For that purpose, Process Management shifts down to form the AMT and the representatives of the separate

8 partners shift up to form the AGB. A result from these shifts is that the AGB now decides on the policies and the AMT starts to transfer these policies into actions for the POLs. To do this effectively the AMT must have direct access to and control over the POLs. In this step the separate companies still have a direct say in what their respective POLs do. At the base of the changes in this step, there should be a contract which defines the roles of the respective layers in the organization. Since EspritHuis is going to be a large strategic alliance, the contract should also state how the partners decide the way members of the AMT are selected. They could use election, a rotation schedule or any other way, for as long as all partners are in the AMT every once in a while. After the third and final step (Figure 6), the final organizational setup is reached by integrating the POLs into one large operational layer (OL) inside the alliance. The AMT has full control over the activities in the OL. The different companies can influence the work done by their own POL only indirectly by adjusting the policies. 6 COCLUSIOS The strategic alliance seems to be a very useful organizational model. It has some interesting possibilities for the construction industry on one hand and the individual consumer at the housing market at the other hand, especially when the market supply in the construction industry will be based on the mass customization principles. The legal forms within the Partnership fit well with the characteristics of the strategic alliance. The Dutch association EspritHuis is willing to start a pilot for a strategic alliance. REFERECES Snijders A.F., Strategische alliantie voor Esprithuis, (Strategic Alliance for Esprithuis), Msc thesis, July 2007, TU Delft. Koolwijk J.S.J, Geraedts R.P, Projectalliantie; Procesinnovatie bij complexe bouwprojecten, (Project alliance; process innovation in complex construction projects), 2006, VSSD Delft. Thillart C.C.A.M. van den, Customized industrialisation in the Residential sector; mass customisation modelling as a tool for benchmarking, variation and selection, October 2004, Sun Delft.